Stocks Jump After Fed Says It Will Buy Treasurys

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The Dow Jones industrial average rose 90.88, or 1.2 percent, to 7,486.58 Wednesday.

Updated at 2:03 PM PDT on Wednesday, Mar 18, 2009

NEW YORK — The Federal Reserve is keeping Wall Street's big rally alive — and giving the Treasury market a boost as well.

The Fed said Wednesday it will pump about $1 trillion into the economy, including the purchase of up to $300 billion of long-term Treasury securities over the next six months, as it works to revive the housing market and halt a punishing recession.

Blame Them For Your Empty Wallet

The decision sent both government bonds and stocks soaring as investors expected the move to drive down borrowing costs for everything from mortgages to credit cards. The Dow Jones industrial average reversed early losses to end up 91 points the yield of the benchmark 10-year Treasury note plunged.

According to preliminary calculations, the Dow Jones industrial average rose 90.88, or 1.2 percent, to 7,486.58.

Stocks have risen for six out of the last seven days. Since the market rally began last week, the Dow has jumped 14.4 percent, and the S&P 500 has soared 17.4 percent.

The move, analysts said, is likely to produce an immediate drop in mortgage rates — of 0.25 to 0.5 percent percentage points, as the Fed made clear that it would be able to purchase the majority of new mortgage-backed securities for at least the rest of the year — and possibly longer.

That's great news for those borrowers with good incomes and healthy credit scores who are able to qualify for a loan. But dramatically tighter lending standards have made it tough for many borrowers to qualify.

Still, it was a plus for the housing industry, which many analysts believe must recover in order for the overall economy to prosper again. Homebuilder and financial company stocks shot higher on the news, which came a day after the Commerce Department reported better-than-expected housing start numbers for February.

The Fed said it would build on a plan to buy mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion.

The Fed's announcement accompanied its decision to keep interest rates at historically low levels. It also reiterated Chairman Ben Bernanke's prediction made Sunday night on the CBS program "60 Minutes" that government steps should return the economy to sustainable growth.

"They are certainly, assertively doing everything they can to intervene," said David Darst, chief investment strategist of Morgan Stanley's Global Wealth Management Group.

For both the stock and bond markets, the Fed's announcement was a welcome surprise. After the last Fed meeting in January, policy makers said they were considering buying government debt. But investors were skeptical the central bank would actually go through with it.

The Fed move — which economists call "quantitative easing" — is aimed at effectively reduce market interest rates since the Fed's key rate, the federal funds rate, has been ratcheted down as low as it can go. The market traded lower ahead of the Fed's decision.

Government bond prices surged. The yield on the benchmark 10-year Treasury note, which moves opposite its price, tumbled to 2.48 percent from 3.01 percent late Tuesday.

Technology stocks, meanwhile, were lifted by news that International Business Machines Corp. is in discussions to buy Sun Microsystems Inc. for at least $6.5 billion in cash.